For U.S. bond market returns, we use the Standard & Poor's High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 to 1975 and the Barclays U.S. Aggregate Bond Index thereafter.

I like 1994 because inflation was relatively low, it did not in fact accelerate as the Fed feared, and the conditions of 1993 were of euphoria after a long period of very low, near zero, US interest rates. All conditions that could be duplicated now.

it was also a horrible year and within current investors' memory of bond markets.

1) The really salient datum is not single-year losses, but the slow grinding losses of 1940-1981.

2) Oddly enough, I don't have your answer but just for laughs I looked at the worst single-day losses some time ago. Haven't posted this before because I'm worried about accuracy and because the periods don't match. This is price data on the Vanguard Total Bond and Total Stock Market mutual funds, which I take as high-fidelity reproductions of their respective indices, from Yahoo Finance. And, subject to fact-checking, it looks as if--defining "single-day loss" as "close to close, sometimes meaning a weekend, adjusted for dividends, according to Yahoo Finance"--

--the worst single-day loss for Total Bond from 1990 to 2011 was -1.59% on 4/4/1994

--the worst single-day loss for Total Stock from 1996 to 2011 was -9.19% on 11/28 to 12/1/2008.

I'm a little worried about that though because I don't think there was a 9% drop on a single day even in 2008. Still, here's what Yahoo shows and it's a 9.19% drop from 20.56 to 18.67.

Last edited by nisiprius on Mon May 23, 2011 1:11 pm, edited 1 time in total.

nisiprius wrote:1) The really salient datum is not single-year losses, but the slow grinding losses of 1940-1981.

2) Oddly enough, I don't have your answer but just for laughs I looked at the worst single-day losses some time ago. Haven't posted this before because I'm worried about accuracy and because the periods don't match. This is price data on the Vanguard Total Bond and Total Stock Market mutual funds, which I take as high-fidelity reproductions of their respective indices, from Yahoo Finance. And, subject to fact-checking, it looks as if--defining "single-day loss" as "close to close, sometimes meaning a weekend, adjusted for dividends, according to Yahoo Finance"--

--the worst single-day loss for Total Bond from 1990 to 2011 was -1.59% on 4/4/1994

--the worst single-day loss for Total Stock from 1996 to 2011 was -9.19% on 10/28 to 12/1/2008.

I'm a little worried about that though because I don't think there was a 9% drop on a single day even in 2008. Still, here's what Yahoo shows and it's a 9.19% drop from 20.56 to 18.67.

People really like to sugar-coat bond market history to only US bonds and only to relatively recent US bond history at that. A look at the broader market and longer periods of time paints a picture a whole lot less rosy: https://emagazine.credit-suisse.com/dat ... k_2011.pdf

dnaumov wrote:People really like to sugar-coat bond market history to only US bonds and only to relatively recent US bond history at that. A look at the broader market and longer periods of time paints a picture a whole lot less rosy: https://emagazine.credit-suisse.com/dat ... k_2011.pdf

I don't think I did that. My first point was that the salient period was not single months, but 1940-1981, which I described it as "slow grinding losses." Not very sugary.

Note, too, that as William J. Bernstein describes in only two centuries, from 1801 to 1900, bonds earned an average real return of 5.23% versus 6.76% for stocks.

Last edited by nisiprius on Mon May 23, 2011 1:21 pm, edited 3 times in total.

How bad can it get? I'll tell you how bad it can get. In 1981 a thirty year AAA rated AT&T bond (and remember this was the old Ma Bell, second only to Treasuries in blue chipness) with a coupon yield of 7.5%, with twenty years left to maturity could be purchased for 53 cents on the dollar. That's a current yield of 14.15%, with a virtual guarantee that your principal will almost double in 20 years.

fishnskiguy wrote:How bad can it get? I'll tell you how bad it can get. In 1981 a thirty year AAA rated AT&T bond (and remember this was the old Ma Bell, second only to Treasuries in blue chipness) with a coupon yield of 7.5%, with twenty years left to maturity could be purchased for 53 cents on the dollar. That's a current yield of 14.15%, with a virtual guarantee that your principal will almost double in 20 years.

And you know what? Nobody would touch them with a ten foot pole.

Chris

So, what's the rest of the story? What ultimately happened to those bonds? Thirty years from 1981 is now, did bondholders somehow get stiffed during the breakup, or did their bonds just mature and pay the face value, or what?

dnaumov wrote:People really like to sugar-coat bond market history to only US bonds and only to relatively recent US bond history at that. A look at the broader market and longer periods of time paints a picture a whole lot less rosy: https://emagazine.credit-suisse.com/dat ... k_2011.pdf

I don't think I did that. My first point was that the salient period was not single months, but 1940-1981, which I described it as "slow grinding losses." Not very sugary.

Note, too, that as William J. Bernstein describes in only two centuries, from 1801 to 1900, bonds earned an average real return of 5.23% versus 6.76% for stocks.

You didn't, but a lot of people on this forum seem to like sugarcoating bond history and pointing that "bond massacres" are all very minor (in comparison to stocks) and that they nearly always quickly rebound back to where they were, while the reality is definately not that.

fishnskiguy wrote:How bad can it get? I'll tell you how bad it can get. In 1981 a thirty year AAA rated AT&T bond (and remember this was the old Ma Bell, second only to Treasuries in blue chipness) with a coupon yield of 7.5%, with twenty years left to maturity could be purchased for 53 cents on the dollar. That's a current yield of 14.15%, with a virtual guarantee that your principal will almost double in 20 years.

And you know what? Nobody would touch them with a ten foot pole.

Chris

So, what's the rest of the story? What ultimately happened to those bonds? Thirty years from 1981 is now, did bondholders somehow get stiffed during the breakup, or did their bonds just mature and pay the face value, or what?

It was 20 years from 1981 or 2001. I believe they were called at par before the breakup, but I'm not sure. I quit looking at individual bonds with the proliferation of bond funds in the mid 1980's.

Worst case is not captured in one year returns. Worst case might be the decade that ended in summer 1982, total returns adjusted for inflation. That kind of long term decline will destroy wealth a lot more thoroughly than any one year drop.

"have more than thou showest, |
speak less than thou knowest" -- The Fool in King Lear

Stonebr's point is correct and may be a timely concern now given what seems (to me) like the reemergence of 1970's-like Stagflation when bond returns were significantly less than government-reported inflation (CPI-U) in 1973, 1974, 1977, 1978, 1979 and 1980. Result was that $1,000 of bonds in 1972 was only worth $719 in 1980 (in constant, 1972 $) even though nominal value was about $1,600 (in 1980 $).

Of course, what the future holds in very cloudy. But Stonebr's point about multi-year impacts is where OP may want to focus.